Breezing through the clouds
US moves to ban menthol cigarettes, which make up 25% of BAT’s US profit, could speed up its focus on next-generation products
ý British American Tobacco (BAT), which is blazing a trail in reducedrisk next-generation products (NGPs), appears to be breezing through the implications of a possible ban on menthol-flavoured cigarettes in the US.
A ban would be a big deal for BAT, since menthol cigarettes are a major market for it after its 2017 takeover of Reynolds American.
But at the time of writing, BAT’s share price had climbed about 5% since the end of April on the London Stock Exchange, despite market views that a ban on menthol brands could stub out a lucrative niche in the US.
Last week the US Food & Drug Administration (FDA) confirmed much-anticipated plans to ban the sale of menthol cigarettes, flagging their disproportionate impact on the health of African Americans.
The FDA said it is already working towards issuing proposed product standards within the next year to ban menthol as a flavour in cigarettes and cigars.
Acting FDA commissioner Janet Woodcock reckoned banning menthol — the last allowable flavour in cigarettes in the US — would help save lives.
“With these actions, the FDA will help significantly reduce youth initiation, increase the chances of smoking cessation among current smokers and address health disparities experienced by communities of colour, low-income populations and LGBTQ+ individuals, all of whom are far more likely to use these tobacco products,” said Woodcock.
Market watchers, however, contend that a full ban could take several years and that menthol cigarette smokers are likely to switch to regular (unflavoured) brands.
This would mitigate the effect of a potential menthol ban on BAT, which has already seen a steady decline in its overall cigarette volumes over the past decade due to health concerns.
Statistics suggest about 85% of black smokers in the US choose menthol cigarettes, compared with less than 30% white smokers. About a quarter of BAT’s profits in the US stem from menthol brand sales.
At BAT’s AGM last week, chair Richard Burrows commented briefly on the menthol issue. But he spent more time on current market dynamics, saying the US volume outlook is unclear as the pace of the country’s economic recovery remains uncertain. He did add, though, that BAT’s year-to-date trading performance had been “robust”.
Burrows believes any regulation around banning menthol would be highly complex and could take years to implement.
“We support regulation that is clearly founded on scientific evidence and which considers all unintended consequences.”
The FDA and antismoking lobbies’ main concern around menthol cigarettes seems to be that the flavour soothes the irritation of inhaling the smoke, but does not reduce the risks of smoking.
In recent years BAT has made a strong pitch at developing its range of NGPs such as vapours (electronic cigarettes), tobacco heating products (THP) and modern oral brands. The regulatory advance on menthol cigarettes is likely to accelerate this initiative, which is punted as a healthier alternative to
traditional tobacco products.
In the last financial year BAT generated about £1.4bn of revenue from so-called reduced-risk NGPs, which grew at a sprightly 15%.
BAT is confident it can reach revenue of £5bn from NGPs by 2025. At last count, the group boasted 13.5-million NGP customers, and it has set a long-term goal of securing 50-million consumers by 2030.
At the AGM, Burrows said the business continued to build on the momentum from the second half of 2020. He said there had been another good performance across all BAT’s NGP businesses.
“We continue to see strong consumer acquisition, consumables volume growth and market share growth. We are confident of meeting our £5bn revenue target by 2025.”
Burrows said that in vapour, BAT continued to strengthen its leadership position in Canada, Europe and North Africa. It would also complete the brand migration to Vuse electronic cigarettes within months.
Perhaps significantly, in view of the possible menthol ban, Burrows reported that Vuse’s year-to-date value share in the US had grown to 29.5%.
This is up 4.6 percentage points on the 2020 financial year, and the brand is now the market leader in 16 states.
Burrows said BAT would continue to invest in NGP brands — especially in the first half of the financial year — to expand new markets across vapours, THP and modern oral.
He stressed this investment was still supported by good revenue growth and value share gains in the traditional cigarette markets, though strong pricing would be partially offset by emerging markets recovering from Covid.
We support regulation that is clearly founded on scientific evidence and which considers all unintended consequences
Richard Burrows